Two Interesting Emerging-Market Retailers From Fundsmith's Latest Portfolio

Gurus' holdings are often a good source to uncover hidden gems

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Jan 09, 2020
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Value investor Mohnish Pabrai (Trades, Portfolio) often recommends the investment strategy of “shamelessly cloning” stock picks from the great investors. While we at Urbem have no interest in blindly copying others’ ideas, we do find it quite helpful to uncover hidden gems by going through gurus’ holdings periodically.

Terry Smith, founder of Fundsmith and widely recognized as the “English Warren Buffett (Trades, Portfolio),” is one of the gurus on our watch list. You may find that his picks have much in common with Buffett's, including a high return on capital, a sustainable competitive advantage and a secular growth driver.

We recently took a look at Fundsmith’s latest holdings and landed on the two attractive retailer stocks below.

BIM Birlesik Magazalar

BIM Birlesik Magazalar (IST:BIMAS, Financial) is the pioneer of the hard-discount retail model in Turkey. At the end of 2018, the company has 6,736 stores in its home country, as well as an additional 442 in Morocco and 300 in Egypt. The management commits to minimizing operational costs in an effort to offer discounts to customers while aiming never to compromise quality and customer satisfaction.

We found that a focus on customer and value is deeply rooted in BIM’s philosophy - e.g., customer benefits over short-term profits, an unconditional return policy, avoiding “Main Street” locations, store decoration with minimalist simplicity, less advertising, maximizing private label offerings and limiting the total product portfolio.

In our opinion, the scale, brand and customer proximity together build the economic moat at BIM. Due to the high purchasing power, the company is the largest buyer of most of the products it sells. Stores are typically rented at locations nearest its customers. The BIM brand is well-known for offering “the highest quality products with the best prices,” and its private-label products are generally market leaders in their respective categories.

As you can see below, BIM consistently delivered a more than 50% return on capital every year during the past decade.


Clicks Group

South Africa-based Clicks Group (JSE:CLS, Financial) is a retail-led health care group, selling pharmaceutical products, care and beauty products and music equipment through a network of 870 stores under the Clicks, Musica, GNC, The Body Shop and Claire's brand names. The company also runs United Pharmaceutical Distributors (referred to as “UPD”), which fulfills the pharmaceutical supply needs of Clicks, along with private hospital groups and independent pharmacies. According to the recent annual filing, retail distribution accounts for almost 70% of the total revenue. In addition to its home market, Clicks Group also has the store presence in the neighboring countries of Namibia, Botswana, Swaziland, and Lesotho, which, in aggregate, represent less than 6% of the total revenue.

We think that Clicks Group operates in an attractive market, which is defensive and benefits from multiple regional tailwinds such as improving living standards and increasing urbanization. Per the chart below, the business delivered an above 20% return on invested capital every year for over a decade now, indicating the management’s skillful capital allocation as well as the existence of an economic moat.


In our view, the company has achieved a certain degree of scale advantage and brand recognition. For example, the anchor brand, Clicks, has the largest health and beauty retail chain in South Africa with a 25% market share. Its loyalty program, Clicks ClubCard, has over 8.1 million active members. UPD is the country’s leading full-range pharmaceutical wholesaler and the only one with a national presence, sharing 27% of the private pharmaceutical wholesale market.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We do not own any security mentioned in the article.

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